UMG Ready For More Innovative Deals And Lawsuits

Zach Horowitz, Universal Music Group president/COO, made a rare public speech during Grammy week here to provide entertainment lawyers with some context to the company's recent initiatives. The company will not shy away from suing social networking sites and is using its royalty-bearing licensing deal for Microsoft's Zune player as a template for future deals, he said.

During the Grammy Foundation's Entertainment Law Initiative luncheon on Friday (Feb. 9), Horowitz expressed his disappointment and surprise at the legal positions taken by News Corp.'s Fox and Sony Pictures, owners of social networking sites Myspace and Grouper, respectively. UMG has sued the sites for copyright infringement. Even though Fox and Sony advocate creators' rights, Horowitz said, they are now trying to shelter themselves from liability for copyright infringement.

The suit against MySpace came after one of UMG's biggest releases of last year, Jay Z's comeback album "Kingdom Come," was posted on the social network site multiple times "before its release date, in its entirety, on demand, to potentially millions of listeners -- for free -- without our consent," Horowitz said. If Universal posted one of Fox's films online before release in a similar way, he has no doubt the motion picture company would rushing to the courthouse to stop it.

Even though UMG does not believe that litigation is the answer to the problems confronting the business, Horowitz said, litigation is necessary to be able to innovate. Litigation can level the playing filed so that new, legitimate alternatives have an opportunity to gain traction. Litigation can also inhibit "bad actors" from entering the fray, and it can lead other newcomers to make deals before launching services, he said.

Horowitz noted that the widely-publicized comments by UMG's chairman Doug Morris about pursuing legal action against social networking and user generated sites helped bring You Tube to the bargaining table with Universal and other companies.

Universal's recent lawsuits against MySpace, Grouper and Bolt were called "the first" suits, implying there will be more filed against similar sites if necessary.

"We appreciate that there are benefits, from time to time, in voluntarily working with these kinds of sites to expose our artists and their music," Horowitz said. "But that has to be our choice, not the whim of a third party."

Horowitz noted that despite every survey showing that more music is listened to by more people than ever before, every week there is another story about declining sales and profits, layoffs, and music companies closing or consolidating. Record companies are competing against those who give away music for free, those who have "no need or desire to invest in the content they distribute, and no concern that those who create will stop creating if they aren't paid for their work," he said.

UMG is confronting the challenge in five ways, he said:

- Empowering legitimate alternatives to compete with the illegal ones;

- Working with artists to leverage their brands and share in new revenue streams;

- Developing new products and formats that give added value to consumers;

- Requiring compensation from those who seek to use UMG's content to build their businesses; and

- Exploiting the opportunities of the Internet, wireless networks, and whatever new technological innovations are brought to UMG -- to get more music to more consumers, where they want it, how they want it, when they want it -- and to be paid to do so.

Horowitz also mentioned UMG's deal with Microsoft, which requires Microsoft to pay a royalty for every Zune player sold in addition to a royalty on tracks sold at Microsoft's store. "It's a groundbreaking precedent that recognizes that it's the music that overwhelmingly drives sales of these portable players," Horowitz said. "And it is all the more important since so much of the music carried on these players is never paid for at all."

Horowitz called UMG's negotiations with Microsoft, and similar negotiations with AOL and Yahoo, "templates for the way we are structuring deals going forward -- monetizing our content in ways unimaginable just a few years ago."